WH Group Limited (288) Earnings Call Transcript & Summary

Good evening, analysts and investors. Welcome to the Third Quarter 2025 Results Presentation of WH Group. I'm Guo Lijun, Executive Director and Chief Executive Officer of WH Group. Joining us today are members of the management teams from WH Group and our subsidiaries, Shuanghui Development, Smithfield Foods and Morliny Foods, including Mr. Wan Long, Chairman of the Board and Executive Director of WH Group; Mr. Wan Hongwei, Vice Chairman of the Board of WH Group and Chairman of Shuanghui Development; Mr. Ma Xiangjie, Executive Director of WH Group and President of Shuanghui Development; Mr. Liu Songtao, Executive Vice President and Chief Financial Officer of Shuanghui Development; Shane Smith, President and CEO of Smithfield Foods; and Mark, CFO of Smithfield Foods; Luis, CEO of Morliny Foods; Joanna Yan, Chief Financial Officer of WH Group, Vice President of WH Group Zhou Xiaoming. Today's presentation will be divided into two parts. First, we will present the financial and operational performance for the first 3 quarters of the year, followed by the Q&A session. So let me walk you through the company's performance in the first 3 quarters. In the first 3 quarters of 2025, packaged meats sold was 2.231 million metric tons, 2.2% decline year-over-year. Pork sold was 2.967 million metric tons, 8.4% increase year-over-year. Revenue, USD 20.47 billion, 8.5% higher than last year. EBITDA, 2.496 billion, 10.7% higher year-over-year. Operating profit, USD 1.92 billion, 7.3% higher year-over-year. Profit attributable to owners of the company, USD 1.168 billion, 8% higher year-over-year. Basic earnings per share, USD 0.0910 per share, 8% higher than last year. So in the first 3 quarters, the company has exhibited growth in volume revenue as well as profit. Now look at the business performance by segment. Packaged meats contributed 50% of our revenue and 83% of our operating profit. Pork is 40% of the revenue and 20% of the profit. Other business is 8.7% of the revenue and contributed to a loss of $58 million, which includes other business as well as the corporate expenses. If you look at the performance by region, North America represented 54% of the revenue and 51% of the operating profit. China represents 30.8% of the revenue and 37.6% of the operating profit. European business is 15.2% of the revenue and 11.5% of the operating profit. So North America generated more than 50% of both the revenue as well as operating profit. In the first 3 quarters of 2025, hog prices in China fell continuously due to sufficient supply and weak demand. In the U.S., performance of hog production business improved significantly as feed prices continue to decline while hog prices increased. In Europe, hog prices decreased as hog supplies recovers. The number of slaughter hogs in China increased by 1.8% to 530 million heads in the first 3 quarters of 2025. In the U.S., the number of slaughter hogs decreased by 1.3% to 81.7 million heads in the first 8 months of the year. In the first 3 quarters of '25, the average hog price in China was RMB 15.1 per kilogram, a decrease of 10.7% year-over-year. In the U.S., the average hog price was $1.6 per kilogram, up 13.2% year-over-year. In Europe, the average hog price was EUR 1.52 per kilogram, down 6.5% year-over-year. The average pork cutoff value in the U.S. was USD 2.29 per kilogram in the first 3 quarters, an increase of 8.7% year-over-year. The industry market spread narrowed as hog prices increased more than pork values. In China, for the first 3 quarters, the operating profit was USD 724 million, 0.7% decline year-over-year. Packaged meats operating profit $689 million, year-over-year decline of 4.8%. Pork operating profit, $35 million, year-over-year decline of 14.6%. In North America, operating profit was $981 million, 16.6% higher year-over-year. Packaged meats operating profit was $796 million, 6.8% lower year-over-year. Pork operating profit, $275 million, 2.43x higher than last year. In Europe, operating profit, $221 million, 1.8% decline year-over-year. Packaged meats, $111 million, 5.7% higher than last year. Pork, $78 million year-over-year decline of 22%. In terms of our strategies, WH will continue to consolidate global resources, leverage synergies, adhere to the business philosophy of improve mix, adjust price and control costs and the strategy of industrialization, diversification, internationalization and digitalization to enhance our leading position in the global meat industry. In terms of our business priorities, number one, continue to improve the pork business, optimize cost structure, improve hog production KPI, grow the fresh meat sales volume and strengthen market competitiveness. Number two, adhere to the two adjustment, one, control strategy for packaged meat business, expand market network, optimize sales channels and strengthen competitive advantage to drive steady improvement in sales volume and profits. Continue to optimize our business portfolio, steadily achieve protein diversification, further strengthen our global business footprint, mitigate risks, improve quality and enhancing efficiency. Number four, explore and leverage AI to continuously advance industrial intelligence, promote digitalization upgrades in production, sales and business management to reduce cost and enhance efficiency. The company will maintain the momentum of steady growth, build a solid foundation for the long-term sustainable development. So that's all for the presentation. Now we will move on to the Q&A.

[Foreign Language] [Interpreted] The first question will come from the line of Luo Chen from BofA.

[Foreign Language] [Interpreted] Two questions. First question relates to shareholder return. The company has declared a HKD 0.20 dividend -- interim dividend earlier this year. So if we add this up with the final dividend for '24. So the total was -- last year, the final dividend was HKD 0.40. So what's the company's guidance for the upcoming final dividends to be declared next year? And the company has also declared a special dividend of HKD 0.48 this year because of certain capital market-related transactions. Does the company expect the possibility of further special dividends in the future? And secondly, related to the U.S. business. In the first 3 quarters, the U.S. hog production has achieved $15 per head of operating profit -- and considering the fourth quarter is typically a seasonally challenging -- challenging quarter for hog production business. What is the company's outlook for profitability of hog production in the fourth quarter. And because the positive momentum for the hog price has been maintained for more than a year, and the higher hog prices has already put a lot of pressure on the operating profit of packaged meats, which has been visible in this quarter's performance. So what's the company's outlook for packaged meats profits per metric tons? And what would be the company's outlook for hog production or fresh pork business for the next 2 quarters.

Just one more clarification. I'd like to clarify that I'm actually looking for the full year OP per head for the hog production business, whereas for the entire U.S. business, given all the moving parts of the 3 different business, what's our growth outlook for the entire U.S. business in the coming 1 or 2 quarters. Are we looking for positive growth in the coming 1 or 2 quarters?

[Foreign Language] [Interpreted] In terms of shareholder return, we -- as you know, we have adjusted our dividend payout policy from no less than 30% of net profit to 50%. In the interim dividend, we paid HKD 0.20. But for the full year, our guidance is still to follow our policy of no less than 50% of the payout ratios. For the special dividends of HKD 0.48 that were paid this year, it is -- it is because of the IPO of Smithfield as well as the subsequent sell-down in Smithfield, which -- and we have returned all the proceeds from the sell-downs to the shareholders. At this point, we do not have any plans for further special dividends. So the next question relates to the U.S. business. We'll ask Shane Mark to answer.

Yes. So I'll talk to the first question around the U.S. hog production. And you're correct. We've had a really strong year this year in hog production. And while a lot of that has been related to the overall revenue side of the business, meaning the pricing dynamics in hog production. There's also been a tremendous amount of work internally to improve our cost structures. And that's through things like genetic improvements, health and nutrition and things like that to improve our cost structure. We reissued guidance this morning. And as you saw the now expected return for 2025 is between $125 million and $150 million of segment profit in the hog production business. And you're right, there is some seasonality when we look at the fourth quarter, but we expect the fourth quarter to be positive as well to end that year again, within that range of $125 million to $150 million. Now looking forward, we are seeing some strength in the futures markets as we look at the first and second quarter of next year. Now -- right now, that's -- we'll continue to monitor that and follow that -- and as you know, we have different hedging techniques where we see opportunities to lock in acceptable levels of margin, we may take advantage of that. So we are bullish on hog production. I think the team there has done a nice job and you couple that with the -- again, the revenue, the strength in the revenue side of the equation, and we've had a really nice year in hog production. Now packaged meats, again, we raised our -- we reaffirm our guidance in packaged meats for the remainder of the year, but we are seeing pressure in that business. When we look at the underlying commodity markets, you see [ bellies ] out, trim up and that's put pressure on the margins of that business, but we really -- we've been able to increase our pricing alongside that. So really pleased with how that business has done as well. No, I think in the long term, and Mark, you jump in as well. But I think the long-term algorithm for packaged meat really hasn't changed. Right now, we're -- again, we're in a period of high raw material cost, which is pressuring margins to some extent, but we do expect to see that normalized and we'll come out of this cycle, even stronger than we went in. Mark, I don't know if you'd add anything there. .

Yes. No, I would just add that we continue to execute our strategies and stay true to those strategies. We continue to improve our mix higher -- a mix of higher value-added higher-margin items. We continue to appeal to consumers across that price spectrum and private label, which is a real competitive advantage for us. And we continue to do a really good job of taking costs out of our plants our supply chain and SG&A. So we expect to continue to outperform our peers from a margin perspective in packaged meats.

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[Foreign Language] [Interpreted] So 2 questions -- 2 questions from Lillian of Morgan Stanley. So the first question relates to China's packaged meat business. In the third quarter, China packaged meat business has achieved a very strong profit as well as profit per metric tons. The profit per metric ton of RMB 5,200 is probably a historical record. So what's the company's outlook for fourth quarter and 2026 in terms of profit per metric ton for packaged meats. And for the strong profits of packaged meats, how much is driven by low hog prices and how much is driven by the company's management of cost as well as the inventories? And how much of this benefits of lower hog prices can be sustained or carried over to next year. And also what's the company's outlook for hog prices for next year? And secondly, for fresh port business, the company has good volume growth in the fourth quarter. And what's the -- what are the changes in the product mix in terms of fresh and frozen? And what's the company's outlook in terms of profit per ton? And volume for fresh pork.

[Foreign Language] [Interpreted] The first question relates to packaged meats, there are -- you are correct RMB that 5,200 per metric ton profit is a record level. And there are primarily 3 reasons. One is cost. Second is the expense and third is the mix. The hog prices has declined more than we had expected. And on the other hand, we didn't increase too much expenses. In the third -- in the fourth quarter, there are a few factors to consider. First is that we will step up our investments in marketing to support our market competition. And secondly, we will promote more value for money products, which will contribute -- will have a good volume growth. So both of these 2 factors will be negative for profit per metric tons. So we believe and the fourth quarter profit per metric ton for packaged meats will be lower. The full year and the full year guidance for profit per metric ton will be RMB 4,700 per largely consistent with last year. For next year, we believe the hog prices is expected to continue to be lower. But on the other hand, there will be a lot of competition in the market. And our strategy will be to stabilize our profit and while we expand our volumes. So we do not expect to achieve higher profit per ton for packaged meats, and we will probably maintain around RMB 4,700 level.

[Foreign Language] [Interpreted] The second question on fresh pork in the fourth quarter for the domestic meat, we believe the volume and the profit will both increase, but for the imported meat, the profit will decrease primarily because of the tariff. And overall, our profit for fresh pork will remain under pressure. For the strategy next year, in fresh pork, it is consistent with packaged meats. Our strategy is to stabilize our profit, but expand our volumes. So we want to maintain our profit per head while expand and grow our volumes. And this strategy will be followed in the next 2 to 3 years.

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[Foreign Language] [Interpreted] There are 3 questions from Veronica of UBS. The first one on WH Group profits. We noticed the net profit growth is faster than the operating profit growth, which suggests there are some items below operating profit that has positively impacted net profit, can the company provide explanations for these nonoperating items or accounting items? And will these items continue to impact the result in the fourth quarter. And secondly, related to the U.S. hog production business. As Shane mentioned earlier, that we can use the hedging to lock some of the profits when the market opportunities are appropriate. So what's the company's strategy in terms of hog production hedging and what's the percentage of hedging? And thus, your comment earlier suggest that we will plan to step up the percentage of hedging positions next year. And the third question, as Mr. Ma has commented earlier, the hog price will remain low next year. So how will that impact the Shuanghui hog production business in terms of our plan as well as profit.

[Foreign Language] [Interpreted] So between the operating profits and net profit, there are a couple of nonoperating items such as gains from asset disposals, some gains from the insurance claims and some expenses related to the plant closures and hog production reformations as well as certain provisions for litigations. So compared to last year, we had higher gains related to insurance claims. So that's a positive year-over-year compared to last year. And on the -- and also for the plant closures, last year, we had more expenses related to plant closures and the hog production reformations, which is -- the amount was recognized last year, whereas this year, the amount is very low. So that's also positive year-over-year. But there are a number of factors that may be offsetting each other.

[Foreign Language] [Interpreted] And we will invite Shane and Mark to discuss the question related to hedging strategy.

Yes. I think as it relates to hedging, it's really important to view hedging as part of our overall broader strategy. So that works alongside both our operational and our financial decisions as we think about performance in hog production. There are timing differences in how hedging results are recognized. But overall, our approach is always really focused on supporting those overall performance objectives. And you asked specifically about percent of hedging and things like that. And we don't give or talk about or give away how we're positioned in the market. But overall, the philosophy in hedging is really about risk management. And we're not trying to make market predictions. We really use hedging techniques to reduce exposure to different market price fluctuations. And we build hedging positions when conditions are favorable that enable us to really limit our downside risk. And so again, from a hedging standpoint, we don't give away -- or talk about the positions that we're in, but we -- that is kind of the philosophy we take. It's just part of an overall broader strategy as it relates to hog production.

[Foreign Language] [Interpreted] So 3 comments related to your question, hog production in China. First, on hog prices, we expect the hog prices for 2026 will be lower in the first half and higher in the second half, but on average, will be RMB 1 per kilo lower than 2025. And secondly, for our hog production business specifically, the business has improved significantly compared to last year, and our cost has come down quite a bit. But there remains a gap with the first-tier players in China. And the loss -- we continue to lose money in hog production in China, but year-over-year, it has shown a very substantial improvement. And thirdly, for 2026, we believe the speed of the magnitude of reduction in our own hog production cost will be larger than the decline in hog prices. So we expect hog production business in China to be profitable next year versus a loss in '25, even though the profit will not be very substantial.

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[Foreign Language] [Interpreted] Two questions from Valerie of Goldman. First one on China packaged meat business. In third quarter, the packaged meat business volume has increased slightly or largely consistent with last year. But in the interim results earnings release, the management has talked about more ambitious growth of volumes for packaged meats in the third quarter and particularly in fourth quarter. So what kind of challenges does the management see in China's packaged meat market? As mentioned earlier, the company expect to launch more value-for-money products in the fourth quarter? And what will be the company's guidance for volume in fourth quarter and 2026? And the second question relates to European business. Based on the numbers, it looks like the European hog production in the third quarter was under a bit of pressure. And what's the management's outlook for the fourth quarter for all the 3 business lines?